Why Stocks Rise Before the Economy

COVID-19 has caused many problems for people around the entire world. Putting large and small businesses out on the curb, forcing children to have to adapt to a new way or leaning, leaving people joless for who knows how long. All of these things have one thing in common; the economy. The economy has tanked so hard in these few months that we are now in the biggest economic drop the US has ever seen. That’s crazy how we were living our lives pretty normally the first week of March and then had to transition to a completely different way the following week. I follow the economy somewhat frequently in the form of stocks and I noticed that some stocks are gaining points, but the economy is still down. This blog post will be exploring why stocks come back up before the economy.  

When something huge happens in the world, stocks are most likely to go down. In this case, one stock that went down a lot was gasoline because no one around the world was driving as much as they were in previous months. The stock market was down 34% at its lowest on March 23. Now, it is starting to come back up slowly each day. This is because investors are forward-looking, and they are buying in advance of better days ahead. That’s one explanation for the market’s 25% rebound rally in the past month.

Investors are always looking toward the future and less of what happened yesterday. They see patterns in the data and look at how they can improve in the next 1, 6, 12 months. This is a hard thing to do in a time like this because of how the word is handling the pandemic. False information coming from many sources makes it hard to decide who is right and who is wrong. Investors right now are looking into news and business because they can’t get any worse. The stock will increase slowly over time as the pandemic comes to a close, and it’s one of the only stocks at the moment that is sure to rise in price somewhat regularly.

One thing to keep in mind is that stock prices change based on how things turn out, relative to expectations. Jason Brady, CEO of Thornburg Investment Management, sums up the disconnect between negative headlines and positive stock price action: “If prices try to take into account the end of the world, and the end of the world is slightly less likely to happen, equities can rise.” This is what we can see today with the curve starting to flatten. As more people follow the rules (and the remainder of the states stay closed) the curve will continue to flatten and “the end of the world” will seem a lot less likely than it did mid-March.

In closing, stocks are dependent on expectations and reality. I will keep an eye out for stock changes and see how they fluctuate as more news and information comes out about the virus. It will be an interesting next few months as the economy fights to come back, but we need to remember that this is a marathon, not a sprint. If we continue to fight COVID-19 too fast without proper tests, it will last a lot longer than it would if we take our time and fight it the way it needs to be fought.

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